By Jeff Balke
By Aaron Reiss
By Angelica Leicht
By Dianna Wray
By Aaron Reiss
By Camilo Smith
By Craig Malisow
By Jeff Balke
After Enron's bloody bankruptcy, legal giant Vinson & Elkins drew fire for contributing to the downfall as the corporation's legal adviser. Attorneys for the downtown law firm had signed off on Enron partnership agreements that created the illusion of massive Enron profits -- while executives diverted millions of bucks to their own pockets.
So just imagine the screaming headlines if the Enron board of directors had included the senior partner of V&E. And to thicken the imaginary scenario, throw in a shadowy consulting contract to another director -- for services the company vaguely described to shareholders as being "in connection with deregulation and other issues."
Even in its wildest flight into business fantasy, Enron's management never got quite that creative. For these plot twists, you'll have to go to another local corporate biggie, high-profile Reliant Energy.
The corporation, like most, has outside directors who are not company officials. In the business world, these directors supposedly provide impartial oversight of policies and operations on behalf of shareholders. In the past, cozy business ties between board members and their corporate hosts were more the rule than the exception. But after a decade-long reform movement, the Enron debacle has added momentum to efforts to end conflicts of interest on boards and is putting such connections under the public microscope.
Roger Raber of the National Association of Corporate Directors testified on the issue before the U.S. House Energy and Commerce Committee last month. "Good corporate governance requires, above all, the presence of independent and informed directors who have the courage and integrity to ask difficult questions," he said.
Guidelines by Raber's group define the ideal outside director as someone who has never been an employee of the company or its subsidiaries, is not related to anyone with the company, is not employed by any firm providing major services to the company, and receives no company compensation other than director's fees.
Enron's board included plenty of directors who flunked that smell test, and Reliant is apparently no different. Just look at the latest proxy statement for shareholders. In 2000, the company paid the Houston law firm of Baker & Botts $19.6 million for services. The relationship continues, though the company declined to provide figures for last year. The firm's senior partner, former U.S. secretary of state James A. Baker III, 69, was appointed to the Reliant board in 1996 and is still there.
Another director, Milton Carroll, is the 50-year-old chairman and CEO of Instrument Products Inc. He landed a $260,000 consulting contract with Reliant in 2000 for something to do with energy deregulation issues, although a Reliant spokesman declined to give any details.
Carroll began his career as a draftsman for Schlumberger Well Services and then started his own oil-field tool company. But his Reliant consulting contract apparently involves political rather than geological drilling.
"Do you think this arrangement has anything to do with his close relationship with Houston state Senator Rodney Ellis?" asks a source who supplied background information on the director's extra gig. "Any disguised lobbying/ political payments here? Pretty high rate per hour, considering this isn't Carroll's full-time job."
Carroll also serves as board chairman of Houston Endowment, and he is a past chairman of the Texas Southern University Board of Regents and he's a director on the boards of Ocean Energy, Health Care Service Corporation and Teppco Partners LLP.
Neither Carroll nor Baker returned Insider calls about their ties to Reliant.
Other nonemployee members of the Reliant board include Compass Bank chairman John T. Cater, energy think-tank executive Richard Balzhiser, developer and former Metro chair Holcombe Crosswell and Alex Schilt, the ousted University of Houston chancellor who is now a UH College of Education prof.
For their labors overseeing Reliant, the independent directors receive $30,000 a year, plus $1,000 for each board or committee meeting they attend, along with a gift pack of 1,000 Reliant shares annually.
Douglas Moll, a UH law professor who teaches business ethics, says relationships like Carroll and Baker have with Reliant are legal -- although they inevitably raise issues about conflicts of interest.
"The worry in all these transactions is that as a director, you have a fiduciary duty to act for the best interests of the company and the shareholders collectively," explains the professor. Putting himself in the shoes of a director hired by company executives, Moll asks: "Without knowing anything else, am I more likely or less likely to challenge the CEO/chairman of the board when he or she wants to do something I disagree with? Clearly, I'm less likely.
"Your hypothetical consultant is getting paid a large amount of money and wants to please what we call the inside directors, meaning the directors that are also company executives, because they're responsible for whether the consulting contract goes away next year." Moll says such relationships are not unethical if the director is the person best qualified for such a job and the ties are fully disclosed.
Whether Carroll is Reliant's best-qualified consultant on energy deregulation is open to question. If he simply exercised his political connections, a quarter-million dollars seems a lot to charge.
As for Baker's presence on the board, Moll calls it a classic example of what he regularly teaches classes about: the appearance -- as well as the substance -- of conflict of interest. The law requires directors to abstain from board votes on matters involving their interests, but there is still the question of influence with fellow directors. After all, who wants to get on a former secretary of state's shit list by denying his law firm the biz?